Wages Fall Although Economy Adds 292k Jobs in December

The unemployment rate remained at 5 percent, even as the Labor Department revised up its estimates for job growth in October and November. The worrying detail in an otherwise good report, however, was wages. Not only did wages fail to rise by the amount expected, they actually fell in December.

Average hourly wages in December actually fell to $25.24, down a penny from November. The average number of hours worked was also unchanged. To use a technical term, these are weird results. Average hours worked and wages ordinarily rise in the face of strong job growth, as a tightening labor market forces employers to increase pay or get more work out of existing workers.

Part of the explanation could be that while the economy added 2.7 million jobs in all of 2015, this is down considerably from the 3.1 million added in 2014. The labor force participation rate, i.e. the number of adults with a job or looking for work is still at an historically low rate of 62.6 percent.

Another part of the explanation is that job growth doesn’t occur in a vacuum. Every year, the adult population of the country increases, requiring strong job growth simply to keep pace with population change. In 2015, the adult population in the U.S. grew by 2.9 million people. The 2.7 million jobs the Labor Department said were added last year, then, didn’t keep pace with the growth of the population.

This suggests there is still a lot of weakness in the labor market. The economy is gaining jobs, but not faster than the population is growing, so there isn’t pressure to lift wages or increase hours. The net result is that average weekly take-home pay in the month of December actually fell slightly.

In a note to clients, Citi previewed today’s jobs report by calling it the “least important payrolls report in a while.” As Citi notes, “[n]onfarm Payrolls is a lagging indicator at the best of times.” In the past, the monthly jobs report was highly anticipated for hints about how the Federal Reserve might act on monetary policy.

Last month, the Federal Reserve took action to raise interest rates and signaled its intention to raise them a few more times this year. If anything, the strong job’s report Friday will convince the Fed to continue its monetary tightening.

This week, the IMF downgraded its estimate of world economic growth for this year. Most American banks have already slashed their growth estimates for the fourth quarter. These downgrades are tied to widely reported drops in manufacturing and industrial production. Friday’s jobs report confirms this contracting in manufacturing.

The Labor Department reported that the manufacturing sector gained just 30k jobs in all of 2015, down considerably from the 215k jobs gained in 2014. Most of the job gains reported Friday, in fact, were in temporary services, construction, leisure and hospitality and health care.

There is another note of caution in Friday’s jobs report. In December 2014, the economy gained around 330k jobs. Even though this year’s gain was higher than expected, it was still down from the year before.

If you lower your expectations enough, you will often surprise to the upside.